Tuesday’s ONS release provided a rare slice of good news for George Osborne. Public sector net borrowing, excluding aid to the banking sector, totalled £6.5bn last month compared to £7.7bn in October 2010, leading analysts to predict that the Chancellor will meet his target this year for net borrowing. Now is not the time to clink the champagne flutes, however.
The timing of this news is important. It follows David Cameron’s disclosure on Monday that getting the finances in order is “proving harder than anyone envisaged” and comes ahead of revised forecasts from the OBR next week, which are expected to confirm what others have been saying for months: the Chancellor’s plans to eliminate the current structural deficit by 2014/15 are going to have to wait an extra year, probably even two.
Whether Tuesday’s data will cushion the impact of the impending blow to be delivered by the OBR remains to be seen. The Chancellor will no doubt use it to reiterate the claim that his plan is broadly on track and the country must stay the course to keep the markets at bay. But deep down, he knows he faces an even bigger problem: an economy starved of growth. As he will no doubt be reminded going into next Tuesday’s Autumn Statement, GDP increased by just 0.5 per cent over the year to the third quarter of this year and it remains 4 per cent below its peak level of Q1 2008. Following in the tracks of the Bank of England, the OBR is expected to downgrade its growth forecasts for 2011 and 2012 for a fourth time.
There is no shortage of reasons that have been given to explain the current slowdown. The government would like everyone to think that it is the fault of the Eurozone crisis, despite the fact that our GDP slide started far earlier than the rumblings in Athens and Rome. But the cause of the slowdown is less important than the fact of it. If there is a role for policymakers to play in responding to fluctuations in growth then action is needed now.
Thankfully, Cameron, Clegg, Cable and Osborne have started to acknowledge this, which is why we are likely to see announcements in next week’s Autumn Statement to bring forward planned capital spending and further details on how “credit easing” will be implemented. These steps are welcome, yet on their own insufficient. The package would be made worse if — as is expected — it includes a series of measures to curb employment rights in the view, mistakenly held by those on the right, that this will magically spur job creation in the private sector.
On Tuesday, IPPR published our top 10 ideas for how the Chancellor can revive the stagnant economy and promote sustainable and inclusive growth. Some of our proposals are concerned with the lack of demand in the economy right now, while others focus on what needs to be done to address the long-term structural weaknesses that have plagued our economic performance.
In the short-term, the priority is plain and simple: generate more growth to reverse the recent rise in unemployment and set the economy back on the path to full employment. Hence our call for the Chancellor to pledge an additional £5 billion for infrastructure spending in affordable housing and transport in 2011/12, reverse plans to cut capital allowances which will disproportionately affect manufacturers, and offer a job guarantee to every long-term unemployed young person by injecting an extra £2 billion into a ramped-up ‘Green Deal’. In our view Osborne must also ensure that further fiscal tightening not only heeds to market concerns, but is also response to business and consumer confidence, and the outlook for growth.
In the medium-term, there is a need to ensure that any growth is sustainable — taking advantage of our strengths, whilst not being dependent on a handful of bubble-prone sectors — and that the benefits are shared broadly. To help achieve this, we propose the creation of fully-operational National Investment Bank by 2013, a revamped Export Credit Guarantee scheme to support SMEs and giving the service sector better access burgeoning overseas markets, and a rethink of immigration rules that restrict students and skilled migrants entering from outside the EU, which hampers businesses and our world-class higher education sector.
Faced with the prospect of a decade of stagnant growth, the government must now act. It must first put out the fire and then rebuild the house. This will not be a straightforward task, but it must happen. No amount of good news should distract the Chancellor from the urgent need to announce a credible and comprehensive plan for growth — of the sort we prescribe — this coming Tuesday.
David Nash is Research Fellow at IPPR
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